This commentary originally appeared Dec. 20 on ETF Profits – to access all the strategies from our team of ETF professionals, click here.
Demand has been anemic at best, but stocks got off to a strong start Tuesday cheered by news that business sentiment in Germany rose in December. Perhaps a long-awaited Santa Claus rally is upon us.
Over the past five trading sessions, however, U.S. indices have finished near session lows after showing early strength. Let's see if we can close near session highs today; it would be good for market sentiment. Keep in mind that one day of market strength will not signal a shift in trend. The S&P 500 needs to reclaim the 1260 to 1270 level to break the downtrend.
Technical damage in the exchange-traded fund space remains widespread. In a universe of about 1300 ETFs with market capitalizations of at least $100 million and minimum average daily volume of 75,000 shares, I found 53 within 5% of their 52-week highs.
Bond ETFs continue to attract the lion's share of buyers. On Monday, the iShares Barclays 20+ Year Treasury Bond Fund (TLT) broke out, albeit in light volume, rising $1.55 to $123.87. I sold TLT too early on Nov. 30 for a small profit for my ETF model portfolio (updated every Friday). At the time, it looked like it was about to give up its 50-day moving average. But Monday it broke out over $123.05, its Nov. 23 intraday high. Its 52-week high is $125.03.
If money starts to flow consistently into U.S. stocks, it will likely spark an outflow of money from bond funds. But there are no signs yet that institutional buyers are ready to buy U.S. stocks with conviction. As a result, I expect bond funds to continue their recent outperformance. Early Tuesday, shares exchanged hands around $121.47, down 2%.
The strength of the U.S. dollar continues to be a headwind for the majority of ETFs that hold U.S. stocks. The U.S. major averages remain stuck below resistance levels, and that's the case with most ETFs on my screens. On Monday, the PowerShares DB US Dollar Index Bullish ETF (UUP) added $0.08 to $22.57. It's stubbornly holding near highs. A key support level is its 50-day moving average at $21.94. Shares were recently trading around $22.33, down $0.24.
Meanwhile, it's going to take consistently positive headline flow out of Europe to bring sellers into the ProShares UltraShort Euro (EUO). But to think that good news will soon start to outweigh bad from Europe might be a tall order, and that could result in continued buying interest in EUO.
The fund outperformed Monday, rising $0.15 to $20.18. EUO seeks results corresponding to twice the daily inverse return of the U.S. dollar price of the euro. It recently broke out over $19.54. Early Tuesday, shares were trading around $19.78, down $0.40.
Not surprisingly, index-short ETFs are also doing well, including ProShares Short MSCI Emerging Markets (EUM). The fund seeks performance corresponding to the inverse daily performance of the MSCI Emerging Markets Index. EUM showed a technical sign of strength Monday, clearing a descending trend line in heavy volume, and shares rose $0.87 to $35.12. Volume nearly doubled to 727,000 shares. Early Tuesday, shares exchanged hands around $33.99, down $1.13. A support level for EUM is its 50-day moving average at $33.34.
When it comes to TLT, EUO and EUM, the trend is your friend -- for now. A strong day for the market Tuesday fueled selling in all three funds, but it will take a lot more than one day of selling to signal a trend shift.